ETF: Global property 40 in SA

In ETF Blog, Latestby Kristia van Heerden

REIT incomeThe S&P Global Property 40 index invests in the 40 biggest and most liquid property companies that fall within the S&P Global broad market index (BMI). In South Africa, both CoreShares and Sygnia offer ETFs that track this index.

Global property investments typically offer a wider variety of property companies than local indices. Included in the S&P Global Property 40 index are companies that own and rent out homes, buildings, warehouses and self-storage units. The index also includes real estate development companies, property managers and companies that rent and lease real estate.

The ETF excludes companies that are indirectly involved in property financing, development and maintenance. This means the ETF is underpinned by physical real estate all over the world, providing an added layer of security for the skittish investor.

While the ETF is positioned as a global fund, it invests only in developed economies:

  • United States 55.7%
  • Japan 14.0%
  • Hong Kong 12.4%
  • Germany 5.7%
  • France 4.3%
  • Australia 3.8%
  • United Kingdom 3.2%

Across the globe, companies must meet certain criteria to be deemed a real estate investment trust (REITs). In South Africa, REITs must own at least R300m in properties, earn 75% of their income from property holdings and pay at least 75% of their taxable earnings to investors each year. The companies included in the rand-based S&P Global Property 40 index must comply with the local REIT criteria to be included.

In addition to the REIT requirements, companies must have at least $1bn in total market

capitalisation (the amount of shares available times the share price), trade an average of $3m per day over a three month period, have positive earnings and must have paid dividends. To avoid over-exposure to a certain region, no more than 20 companies can be from a single area. However, if a region has fewer than five companies that meet the criteria, that region is excluded.

While the constituents are weighted by market capitalisation, no company can represent more than 10% of the index. Both ETFs pay dividends twice a year.

Tax-free treatment

Within the tax-free investing space, REIT ETFs are especially appealing. REIT income is added to a taxpayer’s annual income and taxed at the marginal rate. While dividend withholding tax is capped at 20%, high income earners can pay as much as 45% tax on income earned from REITs. Within the tax-free environment, however, all income from these ETFs will exempt from local taxes. Unfortunately taxes deducted within the different regions can’t be recouped. If tax efficiency is your top priority, at local REIT ETF might be a better option.

CoreShares vs Sygnia

Both the CoreShares Global Property ETF and the Sygnia iTrix Global Property ETF track the S&P Global Property 40 index. When comparing two ETFs that track the same index, costs become very important. There are three numbers you should pay attention to, which we discuss below. You can get these numbers from the minimum disclosure documents (MDDs) that ETF issuers are legally required to make available. etfSA.co.za has a comprehensive list here

  1. TER or TIC

Firstly, the total expense ratio (TER) is how much it costs ETF providers to run the ETF. Think of this as a management fee. These days providers are also required to disclose the total investment cost (TIC). Not everyone does yet, but if you can find the TIC, it’s a better indicator of the true cost of the investment. Remember, these costs get deducted from the income you should be receiving from the ETF, so you never actually see this money leave your portfolio. Just because it’s a sneaky fee doesn’t change the fact that it eats your money. In the case of these two ETFs, both providers disclose the TER, but only one discloses the TIC. The CoreShares product will eat 0.69% of your investment per year, while the Sygnia product will take 0.23%.

2. Spread

Spread is the difference between what you can get for an ETF when you sell it and how much it will cost you to buy it. If ETFs are selling in the market below what you pay when you buy it, the ETF has to grow by the difference before you can sell it for the same amount you paid for it. It has to grow more than that for you to start making money. You find spread by comparing the buy price and the sell price. Look out for the words “bid” and “ask”. The bid is how much someone is willing to pay for the ETF. The ask is the price a seller is willing to accept for the ETF. ETF prices are determined by the ETF issuer based on the shares within the ETF. The ETF issuer therefore has a lot of control over the ask price in the market. The closer together the bid is to the ask, the cheaper this once-off fee is. When the prices are close, we call it a “tight spread”. Spreads change all the time, so you’ll have to find these numbers on the day you buy. You should be able to see them on the platform where you buy your ETFs.

3. Tracking error

Tracking error is not a fee per se, but it speaks to how efficient the ETF issuer is. An ETF is a product that buys all the companies in an index. The companies are packaged together in different configurations and then sold to us as an ETF unit. That process of “packaging” the companies costs money and takes time. The performance of the ETF will always be slightly below the performance of the index, since the index is a purely theoretical construct. When comparing two ETFs, it’s sensible to choose the ETF that tracks the index as closely as possible to ensure that you get as close as you can to the performance of the index. ETF issuers disclose tracking errors in the MDDs, but be sure to compare the tracking error for the same time period.

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